Retirement Bucket Strategy: What to Know

You’ve spent decades saving for retirement—but how do you ensure those funds last for the rest of your life? It’s a crucial question, especially since about 67% of retirees rely on assets specifically designated to produce retirement income, according to a study by the Federal Reserve. The retirement bucket strategy offers a purposeful way to draw from your accumulated wealth while fostering long-term growth.

This article will explain how the retirement bucket strategy works, featuring insights from financial advisors on its function and implementation. You’ll also learn about the pros and cons of the approach and potential alternatives to consider.

What Is the Retirement Bucket Strategy?

The bucket strategy is a method of drawing down your retirement savings in an intentional way. It focuses heavily on balancing short-term needs with long-term growth. This allows you to keep cash available, mitigate risk, and experience gains over time via equities.

When one nears retirement, this often means a shift to more conservative investment options (fixed-income securities, cash and cash equivalents, etc.) to shy away from as much risk as possible. However, the bucket approach “allows you to stay invested in equities…without the need to panic when the market experiences short-term downturns,” says Tyler Meyer, CFP^®, founder of Retire to Abundance and QED Wealth Solutions. This method replaces fear-driven decisions with an intentional investment strategy.

In practice, the retirement bucket strategy divides your savings into three levels:

Short-Term: Income and Cash

This bucket is for cash and income you need for emergencies or living expenses in the next year. Typically, this includes cash and cash equivalents, which may be held in a checking, high-yield savings, or money market account.

Intermediate: Expenses Within 10 Years

The intermediate bucket is for expenses you’ll need within 10 years. Per Meyer, investing in a “well-diversified bond” portfolio is ideal for this segment. Other fixed-income securities, such as certificates of deposit (CDs) may also fit your needs. These options earn you modest returns over fixed terms while reducing exposure to market volatility.

Long-Term: Growth Investments

The third bucket focuses on long-term growth and is invested in a diversified mix of equities. By allocating your short- and intermediate-term needs to separate buckets, this portfolio segment can remain untouched during market downturns, allowing it to recover and grow over time.

Pros and Cons of the Retirement Bucket Strategy

The retirement bucket strategy can afford you several different benefits. First, it allows you to be prepared for immediate living expenses, while also investing for intermediate and long-term growth via both bonds and equities. Michael Santiago, CRPC™, Senior Financial Editor at RetireGuide.com, asserts that the key benefits of the bucket strategy are that it “simplifies planning, reduces market timing risks, and ensures immediate liquidity,” helping reduce the guesswork and emotion from investing, replacing it with logic and order.

While the method can be beneficial, however, it’s important to consider the drawbacks. With investing, a one-size-fits-all approach may not be optimal for some, especially if you have more complex needs or goals to achieve. The strategy may also be complex for some, requiring education and constant rebalancing to ensure its effectiveness.

How the Bucket Strategy Mitigates Market Volatility

Once you near retirement, relying too heavily on volatile investments, such as domestic stocks, can be risky. During a market downturn, you could lock in losses if you tap into your long-term assets for immediate expenses. The bucket strategy, however, aims to mitigate this risk while giving you the freedom to invest for long-term growth.

Chad Harmer, CIM, MBA, FCSI, founder and financial planner at Harmer Wealth Management, explains that the “immediate bucket provides liquidity for unforeseen expenses, minimizing the need to liquidate long-term investments during unfavorable market conditions.” Because you’ve already allocated cash for immediate needs, you can intentionally devote a portion of your portfolio to more speculative, long-term securities like domestic and foreign equities.

By stratifying your portfolio to blend liquid investments with some long-term securities, you better protect yourself from market volatility. When you place funds in the long-term bucket, you acknowledge you don’t need them in the near future, allowing them time to recover after a market drop.

How a Financial Advisor Can Help Implement It

Setting up the bucket strategy requires careful attention to detail and a base knowledge of investing in various asset classes, including equities, fixed income, and cash and cash equivalents. Additionally, you must consistently monitor and rebalance your portfolio to keep on track. Having a financial advisor by your side to implement it can ensure you don’t make crucial mistakes and set you up for success.

Meyer, an experienced financial advisor, notes, “The key is ensuring clients understand that they have 5–6 years of spending needs in conservative assets, which allows them to stay the course during downturns and benefit from market recoveries.” Additionally, he says that he favors combining the bucket approach with “rigorous research on withdrawal rates, such as the Guyton-Klinger method or the 4% rule,” to achieve results for his clients.

Regarding management of the strategy, Meyer says that he doesn’t “use separate accounts,” but rather manages the buckets “within the overall portfolio allocation.” Then, he will “document the approach and regularly revisit it during semi-annual meetings…making adjustments as life changes.”

It’s crucial to find a high-quality financial advisor that has your best interest in mind at all times. More specifically, a professional with investment management and financial planning experience, such as a Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC), is ideal. This free matching tool, which asks you questions regarding your goals and current situation, can help pair you with an expert that suits your needs.   

Bucket Strategy Alternatives

Several different strategies exist to guide you while drawing down assets after you retire. This includes the 4% rule, which calls for withdrawing the titular amount from your tax-advantaged account each year, as well as the lifetime portfolio. Below is a breakdown of each option and how they differ from the bucket method:

4% Rule

The 4% rule is a drawdown strategy that helps you determine how much to withdraw each year in retirement. Generally, it mandates that you take out 4% of your total saved funds each year to fund your lifestyle. For example, if you have $2,000,000 accumulated, you will withdraw roughly $80,000.

While this rule is simple and relatively easy to follow, it is often criticized by investors and financial advisors for its rigidity and one-size-fits-all nature. We recommend speaking with a professional before you adhere to the 4% rule or any similar drawdown strategy.

Lifetime Income Portfolio

The lifetime income portfolio is another strategy that emphasizes creating a steady inflow of cash via a diversified collection of investments. Harmer describes it as focusing on “both income stability and capital growth, aiming to preserve purchasing power over time.” Unlike the bucket strategy, which aims to balance long-term growth with short-term needs, this method is more about providing consistent income without the need for regular rebalancing.

Frequently Asked Questions

Can I implement the bucket strategy myself?

You can manage your portfolio with the bucket strategy by yourself, but it requires significant time, effort, and investment expertise. Primarily, this is because you must know which investment options fit into each bucket, as well as how much of each to hold. If you don’t feel quite ready for such a commitment, it’s smart to employ a financial advisor to help you implement it.

Is there ever a reason to not have long-term investments in my portfolio?

According to Meyer, “it would be extremely rare” for a person to need to avoid long-term investments completely. He adds that “it would be when they need all their money with that 5-6 year window,” such as when someone in their 20s needs to purchase a home or pay for significant expenses, such as debt in a short time. However, he caveats that this would be a “disastrous retirement scenario” if you needed all of your money within an intermediate period.

What expenses are the intermediate bucket for?

The intermediate bucket is for any expense you expect within about five to six years. For example, if you’re saving to purchase a home or pay for a child’s tuition. The key is that this segment allows you to earn modest returns, while still shielding you from the risk other securities might pose, such as equities.